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HP Says It Will Keep Its PC Business

Hewlett-Packard Co. has decided to keep its PC business, dispelling some of the uncertainty surrounding the company.

The company announced its decision on Thursday, fulfilling a promise by President and CEO Meg Whitman, who said the company would complete its evaluation of whether to keep its PC business by the end of this month.

HP's decision to keep the PC business is not entirely surprising. Since taking over as CEO last month, Whitman appeared to have reservations spinning off the company's Personal Systems Group (PSG), based on her public statements.

Whitman's predecessor, Leo Apotheker, stunned customers, partners and HP investors when he announced in August that the company was considering strategic options for PSG, which included either the sale or spinoff of the group. Apotheker said a decision might take a year or more, rendering PSG a lame duck business. The announcement angered partners and led many customers to rethink ordering PCs from HP. It also gave rivals, notably Dell, an opportunity to poach HP customers and partners.

"After reviewing the results of the analysis, the decision was very straightforward. HP and PSG are better together. A separation would not create incremental return or customer value," Whitman said on an investor conference call on Thursday, which was webcast. "PSG is core to HP's portfolio and it makes strategic, financial and operational sense for HP to retain it."

Though HP earns lower margins on its PC unit than its other businesses, eliminating PSG would not have been a viable option for HP, wrote Technology Business Research (TBR) senior analyst Ezra Gottheil in a research note.

"When HP announced that it was considering spinning off PSG, many customers were disturbed. TBR research showed that some customers started to give greater consideration to other vendors, not only for PCs, but also for servers and services," Gottheil noted. "Customers found HP less predictable and less reliable, which is not good for a strategic technology partner. TBR believes HP partners also were concerned. Many customers and partners had preferred HP for its one-stop shopping, and now a key offering was perhaps being withdrawn."

Whitman indicated that HP was hearing the same thing and fast-tracked the evaluation, which was conducted by 18 distinct teams that considered the ramifications of retaining the PC business versus spinning it off. In the end, it was determined that establishing a new brand for HP's PC business would be difficult and costly, but more pointedly, it would have unfavorable consequences for HP.

"It contributes significantly to HP's supply-chain efficiencies, component pricing, distribution channels and solutions portfolio," Whitman said. "In a separation we'd lose many of the strategic and financial advantages that we've achieved over the years by consolidating areas like real estate, finance, HR and IT. At the end of the day, the cost and risks of a separation are greater than any value that we could create."

Cathy Lesjak, HP's chief financial officer, said that HP's PC business, which in 2010 generated $40.7 billion in revenues, contributes $1 billion in operating profit. While acknowledging margin pressures on the business, Whitman said she saw room for improvement.

Whitman also signaled that she wanted to see HP's PC business address the so-called consumerization of IT by creating systems that are appealing both to enterprise IT managers and consumers.

The company has not decided what it will do with its webOS business, the platform for HP's TouchPad tablet devices, which it withdrew from the market less than two months after introducing them. But options appear to be thin on that front, noted blogger Steve Wildstrom, who reported on Thursday that Richard Kerris, head of developer relations for the webOS business, has bolted from HP to take a similar position at Nokia.

As for a re-entry into the tablet business, Todd Bradley, executive vice president of HP's PSG, said the plan is to deliver devices based on Microsoft's forthcoming Windows 8 operating system. "I think the work we are doing with Microsoft is extraordinarily compelling," Bradley said.

Jeffrey Schwartz is editor of Redmond magazine and also covers cloud computing for Virtualization Review's Cloud Report. In addition, he writes the Channeling the Cloud column for Redmond Channel Partner. Follow him on Twitter @JeffreySchwartz.